When to use Put Options
When you buy a put option you are actually buying the right to sell a given stock at a given price on or before expiration. So if you buy the March $50 call on the stock XYZ for $3 you now can sell XYZ at $50 on or before the third Friday in March. This also explains how it helps to make money when stocks fall. Obviously the right to sell XYZ at $50 is worth more if the stock is at $35 then if it is at $49. Now that you understand how puts make money let us look at how much leverage they give you.
Below is an example of a stock that has broken through support. The stock is trading at $99, if we sold it and bought it back when it got to $81 we would make $7 or about 7% profit. However, say we bought the right to sell the stock at $100 for $4. When it fell down to $81 the put would probably be worth around $20. Let's Show You The Money $20-$4=$16 0r 400%
WOW! A return of 400% vs. 7%. Puts have such high profit potentials if you use them correctly and get out of loosing trades fast! You may be able to gain without being correct 90 so percent of the time. Let's say you put a stop at 50% so you can only lose half of the money invested. You are right just 40% of the time and your average win is 150%. Let's Show You the Equation ($1.5)*(.4)-($.5)*(.6)=$.30 This means on average you would make $.30. However, you must first paper trade before you put any real money into the market. Never enter the market with money you cannot afford to lose. One last thing puts are not just for speculators. They can also be used as an insurance on stocks. This can be done by using a protective put
 
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